I3 UPDATE / Entovation International News

a free monthly briefing on the knowledge agenda

No. 52 July/August 2001





David J. Skyrme


David Skyrme Associates


Contents - Next Feature - Knowledge Digest


Making the Business Case for Knowledge Management:
As Simple as ABC?

David J. Skyrme

Last month (I3 UPDATE No. 51) we looked at developing a successful KM strategy. Rather naively, I overlooked the related activity of making the business case. Although to many senior managers the logic for investing in KM is unquestionable and overwhelming, the fact that I was specifically asked to talk at a KM managers' conference about this subject suggests that many KM professionals still value ideas on how to convince their sceptical management.

In essence, there are only three main planks on which to justify knowledge management:

  • Asset value
  • Benefits potential
  • Cost effectiveness

This is the ABC. They are closely interrelated, since specific initiatives could affect all three, and particular outcomes could be put into more than one category. However, its a useful mnemonic to trigger your arguments. Let's look briefly at each.

Asset Value of Knowledge

How valuable is knowledge? As earlier articles and Insight No. 24 show, the value is in the eyes of the beholder - an opinions vary widely. However, there are several directions you can approach this from:

  • market value: what are specific knowledge assets worth on the open market e.g. a team of experts, a customer database, a licence for a patent?
  • cost: how much does it cost to train a new hire? how many person-days went into developing your intranet content?
  • replacement cost: if you had a disaster (a team leaving, your computer records destroyed), what would it cost today to get back to where you started?
  • liability cost: how exposed are you to legal liability e.g. for product traceability, for long overlooked terms in extant contracts?

Many organizations do not have a handle on the value of their assets. They spend a fortune monitoring and accounting for physical assets, yet ignore those assets - that according to most surveys - are worth 5-10 time more than the assets recorded on the company's balance sheet. Look around you (if you work for a large organization). Does your PC have a company asset sticker on it whose value is recorded in an asset register? Quite probably. But is your value recorded in the same database. Probably not!

Knowledge aware organizations consider human capital as an asset. It is one several components of intellectual capital - others are customer capital, structural capital and intellectual property. Well publicized case studies, like that of Dow's Intangible Asset Management team, show the unrealized value in such assets.

Benefits Potential

For most organizations the real value of knowledge management is in the benefits it brings to the bottom line. These benefits range from increased knowledge worker productivity, to faster time-to-market for new products, to better customer service. Usually these benefits can be traced through a Benefits Tree (see http://www.skyrme.com/tools/bentree.htm). A benefits tree traces benefits from those that affect the bottom line. Typically the benefits fall into the following categories:

  • Information and knowledge benefits - retrieving vital information faster, gaining access to expertise, having all the required information accessible in one pace (e.g. through a portal)
  • Intermediate benefits - minimizing duplication, sharing knowledge across organizational boundaries, getting new hire up to speed faster
  • Organizational benefits - reducing costs, increasing productivity, growing asset valuation, innovation
  • Customer and stakeholder benefits - better products and services, higher quality, better value.

The number of reported KM cases where there are proven benefits running into tens or even millions of dollars is probably now several hundred. So there should be no limitation in finding an organization similar to your own that has demonstrable benefits from implementing KM (there are, of course, quite a few where the benefits have not been realized - but that's for a future I3 UPDATE article).

Cost Effectiveness

This perspective is often a useful summary of the consequence of some of the benefits mentioned above. It is often also the primary category for seeking benefits in cash strapped public sector organizations, or not-for-profit organizations. Its focus is better use of resources. Look at the principle cost areas in your organization e.g.

  • People - one consultancy reckons that every one percent increase in productivity results in a flow through to the bottom line of $100 million
  • Facility costs - by sharing best practice in areas such as office design, health and safety, energy. For example, Chevron is cited as saving $100 million through its sharing of best practices in energy savings
  • The e-business opportunity - here you save transaction costs or shift costs to your users. For example, Sun estimates it saves over $100 million a year on telephone support, but putting much of its technical knowledge on the Internet and extranet.
  • Customers - better customer knowledge and use of CRM (Customer Relationship Management) systems, can help you focus resources on the most profitable customers.

Is It That Simple?

So there you have it - the ABC of an unassailable business case for knowledge management. But is that simple? Obviously not, else there would not be repeated requests for articles such as this. Here are the most common stumbling blocks:

  • Lack of a baseline - few organizations have a good handle on the costs associated with poor information handling or on their current use of knowledge resources. For example, is your organization one of many where professional are not obliged to record their time against clients and projects? Has your organization conducted an information or knowledge audit? Does it have a measure of the effectiveness of various KM activities which it is trying to improve (see the Know-10 quick KM evaluator at http://www.skyrme,com/tools/know10.htm)
  • Costs are immediate and visible - the benefits are typically longer-term and diffuse (hence the need for using a benefits tree)
  • Lack of shared management vision - despite what the corporate plan says, senior managers in most organizations have divergent views on objectives and priorities - try to include benefits that get all your stakeholders on board, but watch for hidden agendas!
  • Too heavily focussed on financial measures rather than broader outcomes - as pioneering work by Karl Erik Sveiby showed, financial measures are lag indicators ; usually changes in intellectual capital measures are a good indicator of what financial results will follow
  • The link between cause and effect is complex; for example, how much can an improvement in organizational performance be attributed solely to knowledge management?
  • There may be unanticipated benefits. For example, early introduction of widespread email often alters communication patterns in unexpected ways and help horizontal knowledge sharing - but how many email systems could foresee that and use it as a basis for justification?

These factors indicate that making a watertight case is far from simple. However, there is one tactic that is virtually guaranteed to work. It's the 'turn off' tactic. If, for example, there are concerns about investing more in an intranet, simply turn it off for a few days. The reaction of those who pop out of the woodwork will give you plenty of ammunitions for improving it!

The one thing that has stuck me in this whole area, is that some of the most successful KM implementations, making a business case was the last thing on people's minds. They just went ahead and did it, learning and measuring as they progressed. But that takes knowledge leadership, something which in far too many organizations is still sadly lacking.

Whichever route you used to kick off your KM initiative, why not share your lessons with fellow readers. I look forward to hearing from you.

Email: David J. Skyrme

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I3 UPDATE / ENTOVATION International News is a joint publication of David Skyrme Associates Limited and ENTOVATION International Limited - providers of trends analysis, strategic advice and workshops on knowledge management and knowledge innovation®

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